Market Offers Investors Opportunity to Reposition
By Lisa Lee
As prices rise and inventory shrinks, attention has focused on buyers’ and sellers’ options, but what does today’s market mean for investors?
Rising values and increased buyer demand make it a good time to sell, while low interest rates stretch the dollar for anyone financing a mortgage. With concerns about what lies ahead for interest rates and capital gains taxes, many investors are evaluating their current position against future goals.
“The current market offers a new opportunity to upgrade, to reposition your equity so that it can work harder for you,” says Chad Takesue, partner and Realtor at Prudential Locations.
Depending on your investment goals, this might mean moving into a larger property, a better location, or a property with improved cash flow.
Takesue points out that different types of properties can be more effective for different needs, and that investors’ goals often change depending on their age and times of life.
“For example,” he says, “I bought my first investment property because I wanted to create my own retirement account. I wanted to invest in something I could count on to appreciate in value over the long-term.”
In contrast, “If you’re getting close to retirement, you may have had appreciation as your original goal, but now you might want to maximize cash flow to create additional passive income.
A property that worked well for long-term appreciation might not provide the cash flow that another property can.”
Two popular vehicles that investors are using to reposition their real estate investments are 1031 exchanges.
With a 1031 exchange, the IRS allows investors to sell one property and exchange it for a similar one while deferring the taxes on the gains of the sale. The new property must be equal to or greater in value than the original property.
“1031 exchanges are a great vehicle to reposition your portfolio. You can exchange properties, or you can move up into a more valuable investment,” says Takesue.
Selling a property in order to acquire one with lower-interest financing can also kill two birds with one stone: you reposition your investment at the lower interest rate, reducing your overall costs.
REVERSE 1031 EXCHANGES
“In a competitive buyers’ market with limited inventory, the reverse 1031 exchange has been a useful option for some of my clients,” says Takesue.
Since 1031 exchanges must occur within a strict timeframe, it has become more challenging for some investors to secure a replacement property as a result of the current low inventory. Reverse 1031 exchanges allow investors to purchase the replacement property prior to the sale of the relinquished property, allowing them to secure their desired property.
Reverse 1031 exchanges are more expensive, however.
Additionally, the investor must be able to finance the purchase of the replacement property, whether with cash or financing, prior to and independent of the sale of the original property.
LEVERAGING EQUITY TO BUY MORE
Some investors see the current market as an opportunity to buy more. They are leveraging the equity that has appreciated in one property to acquire additional property while interest rates are so low.
“If you have built up equity in a property, it’s like money sitting the bank,” Takesue says. “Many investors want their money to be generating the most income that it can. So, they take out the equity that has appreciated in one property and use it to buy another.”
He adds, “If you are financing through a mortgage you want the cheapest cost of money possible. Today’s interest rates expand what an investment dollar can buy. Every 1 percent that interest rates go up is the equivalent of prices increasing by 10 percent.”
Today’s low inventory rates are making it more challenging to acquire properties, however.
“In this environment,” advises Takesue, “it’s smart to work with a real estate professional who knows the inventory and understands the environment, who can help you navigate the current market and secure what you need within the timeframe you need it.”